Commentary: What can Apple learn from Wall Street’s poster child?

SAN FRANCISCO (MarketWatch) — IBM Corp. is heading west this week, where it will be courting investors in Apple Inc.’s backyard.

The cross-country trip by the Armonk, N.Y.-based tech giant is expected to highlight the contrast in how the two very different tech companies use their piles of cash.

Typically, IBM holds its analyst meetings in New York. But just one day after cash-hoarding Apple
AAPL, +0.21%
talked to investors at its annual meeting in Cupertino, Calif., IBM
IBM, +0.34%
— the poster child for returning cash to investors — will host Wall Street analysts about 20 miles away at its Almaden research labs in San Jose.

“We find this an interesting choice of venue as it has been a while since one has been held outside N.Y.,” wrote Shaw Wu, an analyst with Sterne Agee, in a note to clients ahead of the meeting. An IBM spokesman said this is the first time IBM will have a financial analyst meeting at Almaden, and that it hosted its 2007 meeting at its research site in India.

Tim Cook on Apple stock: 'I don't like it either'

(3:25)

Investor reaction to the Apple shareholder meeting, and what Tim Cook thinks about Apple's stock drop and activist investor David Einhorn.

Especially notable is the contrast in the two companies, once rivals in the personal computer business before IBM sold its PC business. Even though IBM posted flat revenue in 2012, it managed to deliver 10% earnings growth in 2012 and has become a shining example of companies that return cash to happy investors. Investor Warren Buffett, who scooped up a big stake in Big Blue, has said IBM’s return of cash made it an attractive investment. Buffett bought more IBM stock in November. Read: Buffett hikes stakes in Wells Fargo, IBM.

In its annual report, which includes a “Road Map” outlining goals for 2011 through 2015, IBM said that since 2000 it has returned almost $150 billion in cash to shareholders, paying $26 billion in dividends and reducing the outstanding share count by over 35%. It plans to return $70 billion to investors through the end of 2015.

“IBM has returned cash while acquiring and divesting companies to move their business mix towards more software and services,” Bernstein Research analyst Toni Sacconaghi wrote in a note that compared the capital allocation tactics of IBM, Microsoft and Apple. In contrast, Microsoft
MSFT, -1.37%
has made costly acquisitions, and kept most of its money offshore.

While it’s no longer the darling of Wall Street, Apple has not been completely sitting still. Under Chief Executive Tim Cook, the company brought back a quarterly dividend and it has embarked on share buybacks. But the cash pile keeps growing, and it is also keeping a giant chunk of its $137 billion cash pile offshore — over $90 billion. During its annual meeting, Cook assured investors that the board was in “very active talks” on the cash pile, but he declined further comment. Read: Apple board in “active talks” on its cash pile options.

Sacconaghi suggested that Apple either repatriate the offshore cash and pay the taxes, or issue debt against it, something the company has been strongly against, while it waits for a potential change in U.S. tax policy. “We prefer that Apple look to take on debt, and note that Apple could repurchase 12% of its stock or double the dividend (to a current yield of 4.8%) for five years with a $50 billion debt issue,” he noted.

He also pointed out that IBM has been far more consistent about returning cash to investors, more so than Microsoft, which began paying a dividend in 2003, but has been inconsistent with stock buybacks. At the same time, Microsoft has frittered away some of its $68 billion pile by overpaying in some acquisitions, such as when it spent $6.3 billion to buy Internet advertising company aQuantive and later took a $6.2 billion charge.

Investors have rewarded companies that give cash back. At its current price to earnings ratio, IBM’s shares are trading at nearly a 30% premium to Microsoft, Sacconaghi noted.

At IBM’s analyst meeting at one of the company’s world-famous research facilities, investors expect the top brass, including CEO Ginni Rometty, to talk about innovation at IBM and its plans through 2015. Analysts are looking for operating earnings per share of about $20 a share in 2015. Wu of Sterne Agee said IBM’s ability to deliver double-digit earnings growth over the past decade is a “feat that only a very few of its peers, if any, have achieved.”

The company’s business model, where it is able to combine selling hardware, software and services to corporations — including the mainframe, once derided as a dinosaur — has also been somewhat unsuccessfully mimicked to date, by another Silicon Valley icon, Hewlett-Packard Corp.
HPQ, -1.00%

So as Big Blue comes west, the more than 100-year-old giant may have a thing or two to teach its younger brethren in Silicon Valley.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.